Detroit retirees back pension cuts by a landslide

Originally published July 22, 2014 at 3:15 am

Updated July 22, 2014 at 5:16 am

A year after filing for bankruptcy, Detroit is building momentum to get out, especially after workers and retirees voted in favor of major pension changes just a few weeks before a judge holds a crucial trial that could end the largest public filing in U.S. history.

A year after filing for bankruptcy, Detroit is building momentum to get out, especially after workers and retirees voted in favor of major pension changes just a few weeks before a judge holds a crucial trial that could end the largest public filing in U.S. history.

Pension cuts were approved in a landslide, according to results filed shortly before midnight Monday. The tally from 60 days of voting gives the city a boost as Judge Steven Rhodes determines whether Detroit’s overall strategy to eliminate or reduce $18 billion in long-term debt is fair and feasible to all creditors.

Trial starts Aug. 14.

“I want to thank city retirees and active employees who voted for casting aside the rhetoric and making an informed, positive decision about their future and the future of the city,” said Kevyn Orr, the state-appointed emergency manager who has been handling Detroit’s finances since March 2013.

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General retirees would get a 4.5 percent pension cut and lose annual inflation adjustments. They accepted the changes with 73 percent of ballots in favor. Retired police officers and firefighters would lose only a portion of their annual cost-of-living raise. Eighty-two percent in that class voted “yes.”

Voting ended July 11, and the counting was done by a private company.

Support for the pension changes triggers an extraordinary $816 million bailout from the state of Michigan, foundations and the Detroit Institute of Arts. The money would prevent the sale of city-owned art and avoid deeper pension cuts. The judge, however, still must agree.

Anthony Sabino, a bankruptcy expert who teaches business law at St. John’s University in New York, said results of the voting are a big win for the city.

“It will pave the way for a confirmation hearing. Detroit will be able to move forward, not with absolute financial certainty but far more than Detroit has enjoyed in decades,” he said.

Indeed, a Boston-based restructuring expert hired to advise the judge said Monday Detroit’s overall bankruptcy plan is “feasible,” a key standard at the upcoming trial. But Marti Kopacz warned that antiquated computer systems, a pledge to spend more than $1 billion to improve services after bankruptcy and a “cultural malady” among workers all will be challenges.

“There are … employees who don’t grasp that their job is to provide a service to the taxpayers versus the taxpayers owing them a job,” Kopacz said in a report released Monday.

There are tens of thousands of creditors in Detroit’s bankruptcy, from bond holders to businesses that provide soap, but much of the focus of the last year has been on the roughly 32,000 retirees and current and former workers banking on a pension. They have put a real and often anguished face on the process.

The judge set aside a day last week to hear the personal stories of retirees frightened about getting smaller checks.

The average annual pension for police and fire retirees is $32,000, while most other retired city workers get $19,000 to $20,000. Orr has said pension changes are unfortunate but necessary because two funds are underfunded by billions. If investment performance improves in the years ahead, he said, the cuts could be restored.

Many retiree organizations had urged a “yes” vote, insisting the pension changes were the best option under tough circumstances. But Dorothy Baker, 64, disagreed. Besides the pension cut, the library retiree who lives in suburban St. Clair Shores would lose a portion of her annuity earnings.

“Don’t they sell assets in bankruptcy? They haven’t sold any assets. There are parking garages and golf courses,” said Baker, who worked for Detroit for nearly 39 years.

The Michigan Constitution says public pensions can’t be cut, but Rhodes said in December that federal bankruptcy law trumps that shield. It was a groundbreaking opinion that could influence local governments across the country that go broke.

Michigan Attorney General Bill Schuette believes the judge is wrong, but he won’t appeal now that retirees have voted for the cuts.